Posted by
Andrews on Wednesday, March 25, 2009 9:57:18 AM
I have read many criticisms of Geithner's buyback plan, and I have to say they are mostly off-base. What Geithner is proposing is the best of the bad solutions. If the government is going to intervene (which I say it should not do), then restoring the worth of the troubled assets is the best solution. It restores the markets to pre-crash conditions without all the extra intervention. Granted, it needs to be structured in such a way that no one uses it to unload all nonperforming assets, nor that anyone makes absurd profits. It also needs to be generous enough that it does restore confidence in mortgage backed securities. However, with those technical considerations in mind, it is the best interventionist solution.
My objection is a simple one. For it to work, we have to stop creating more "toxic assets". As we speak the government is keeping mortgage rates artificially low, still indemnifying loans through Freddie and Fannie, and pushing absurd lending rules through EHOC and CRA. Add to that the early stages of the Obama inflation needed to finance his trillions in new spending, and we will likely be pumping out "toxic" loans at a rate faster than we can retire them.
And that, in a nutshell, is the one caveat I have about Geithner's plan. It is the best of the bad answers, but it cannot work so long as we continue to create more toxic assets. As long as we persist in the policies (easy credit, non-financial criteria imposed on lenders, rampant inflation) that caused the original problem, nothing we do will resolve it.
POSTSCRIPT
I know I have generally pushed for a hands off solution, letting the market resolve its own problems, letting businesses fail, and so on, perhaps with the only government action being to end the artificially low interest rates we have seen for the past decade. But, if we must have an interventionist solution, for some time I have been convinced a conservative buy back scheme would be best. And now I get confirmation I am on the right track. While it worries me Obama is endorsing the solution as part of his scatter shot approach, I think there is still more evidence it is a good idea.
And what is that?
Paul Krugman opposes it. Could there be any more certain sign something is a good idea?
POSTSCRIPT II
By the way, by "conservative buy back scheme" I mean one which simply makes buyers whole. Effectively, it would purchase the loan from the holder at the value of remaining principal, hopefully preventing anyone form making massive fortunes on inflated loans. Before the government bought a loan, there would also have to be clear evidence it was not performing. And the government would try to collect on the loans they purchased, rather than simply writing them off. That should be enough not only to make mortgage instruments valuable once more, but to protect the government against the most obvious profiteering schemes.
Of course, we might need to add some other restrictions, as to types of loans that could be purchased, how long collection attempts would be continued, when the government would foreclose, and so on. But the point is, even the promise of such a program would likely make loans valuable enough once more that the government might not need to buy anywhere near as many as some think.
Well, that is a topic for another post. It is not my favorite solution, but, as I have said over and over, it is the best of the bad solutions and should eliminate the need for more intrusive, authoritarian options.